The rating agency said the credit quality of homebuilders would improve, benefiting from strong demand in the off-plan market
Sales of off-plan properties will remain strong for Emaar Properties and Aldar Properties, with positive investor sentiment supporting strong demand, particularly for high-quality projects. — File photo
The buoyancy of the UAE’s real estate sector is expected to be supported by a strong economic recovery driven by rising oil production, rising energy prices and a rebound in the services sector, although threats to this scenario are rising, analysts at Moody’s Investors Service said.
“We expect UAE real GDP growth of 6-7% in 2022 and the credit quality of the UAE real estate companies we assess will remain broadly stable over the next 12-18 months,” said Lahlou Meksaoui, Deputy President and Principal Analyst. at Moody’s.
“However, more dangerous waves of Covid-19, higher inflation, rising interest rates exacerbated by the Russian-Ukrainian conflict, and recession fears in the United States and Europe pose risks to economic recovery. .”
Despite these risks, the country’s handling of the pandemic and the introduction of new residency visas had already led to a rebound in the labor market, a key driver of housing demand.
The rating agency said the credit quality of homebuilders would improve, benefiting from strong demand in the off-plan market. Sales of off-plan properties will remain strong for Emaar Properties and Aldar Properties, with positive investor sentiment supporting strong demand, particularly for high-quality projects.
“Average home prices will stabilize or decline moderately over the next 12 to 18 months. Homebuilders’ margins could shrink as commodity prices rise, but most have fixed their costs in contracts. »
Moody’s analysts have observed that Dubai‘s population has grown over the past few years, which is positive as population growth will help balance supply and demand in the residential market. According to the Dubai Statistics Centre, Dubai’s population has grown by an average of 3.4% per year since 2017 and 3.6% since the last quarter of 2021.
“We do not expect the UAE’s new corporate income tax to weaken its regional competitiveness or its business environment. The UAE’s corporate tax rate of 9.0% remains lower than other GCC countries,” they said.
“Retail sales in the UAE will remain exposed to weaker consumer confidence as inflation picks up. We expect average rents to be stable over the next 12-18 months. office segment, we expect moderate average rent increases for DIFC Investments as demand for high-quality office properties remains high and supply is tight,” they said.
However, for the global office sector, the contraction in demand will put pressure on the credit outlook, according to S&P Global Ratings. A resurgence in Covid cases, as well as travel and safety issues, have delayed returning to the office, and employees are settling into remote working rituals. Despite increased vaccination rates and a lower death rate from Covid, office utilization remains low globally.
“We expect office owners to face several years of slow growth, with weaker rental prospects and fewer new development projects,” said Ana Lai, an analyst at the ratings agency.
“Tenants are reconfiguring workspace to accommodate the hybrid work model, resulting in an overall reduction in footprint in many cases. As a result, landlords will likely need to maintain high rent concessions to attract tenants. tenants, which will put pressure on profit margins and cash flow.”
Moody’s analysts have argued that tightening financial markets pose no immediate threat to the companies they rate. As financial markets remain volatile and interest rates rise, there is a risk of a prolonged shortage of liquidity which will limit access to capital markets. This will increase the cost of debt for variable rate borrowers and those who need to refinance their debt, they said.
“Higher borrowing costs will dampen investor demand and make it more difficult for small businesses to access capital. However, all of the companies we rate have sufficient cash to cover debt maturities for the next 12 to 18 months. Good asset and unencumbered interest coverage ratios will support stable credit quality,” said Hormazd Motafram, associate analyst at Moody’s.